Learning Module 3: Analyzing Balance Sheets

FINANCIAL STATEMENT ANALYSIS

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Balance Sheet Ratios

Balance sheet ratios include
- Liquidity ratios: measuring the company’s ability to meet its short-term obligations.
- Solvency ratios: measuring the company’s ability to meet long-term and other obligations.

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Liquidity Ratio: Current

\[ \text{Current} = \text{Current assets} \div \text{Current liabilities} \]

• Indicates ability to meet current liabilities

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### Liquidity Ratio: Current

$$
\text{Current} = \text{Current assets} \div \text{Current liabilities}
$$

- Indicates ability to meet current liabilities

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Liquidity Ratio: Quick (acid test)

\[ \text{Quick (acid test)} = \frac{ \text{Cash} + \text{Marketable securities} + \text{Receivables}} {\text{Current liabilities}} \]

• Indicates ability to meet current liabilities

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### Liquidity Ratio: Quick (acid test)

$$
\text{Quick (acid test)}  = \frac{
\text{Cash} + \text{Marketable securities} + \text{Receivables}}
{\text{Current liabilities}}
$$

- Indicates ability to meet current liabilities

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Liquidity Ratio: Cash

\[ \text{Cash} = \frac{\text{Cash} + \text{Marketable securities}} {\text{Current liabilities}} \]

• Indicates ability to meet current liabilities

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### Liquidity Ratio: Cash

$$
\text{Cash} = \frac{\text{Cash} + \text{Marketable securities}} 
{\text{Current liabilities}}
$$

- Indicates ability to meet current liabilities

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Solvency Ratio: Long-term debt-to-equity

\[ \text{Long-term debt-to-equity} = \frac{\text{Total long-term debt}} {\text{Total equity}} \]

• Indicates financial risk and financial leverage

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### Solvency Ratio: Long-term debt-to-equity

$$
\text{Long-term debt-to-equity} = \frac{\text{Total long-term debt}}
{\text{Total equity}}
$$

- Indicates financial risk and financial leverage

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Solvency Ratio: Debt-to-equity

\[ \text{Debt-to-equity} = \frac{\text{Total debt}}{\text{Total equity}} \]

• Indicates financial risk and financial leverage

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### Solvency Ratio: Debt-to-equity

$$
\text{Debt-to-equity} = \frac{\text{Total debt}}{\text{Total equity}}
$$

- Indicates financial risk and financial leverage

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Solvency Ratio: Total debt

\[ \text{Total debt} = \frac{\text{Total debt}}{\text{Total assets}} \]

• Indicates financial risk and financial leverage

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### Solvency Ratio: Total debt

$$
\text{Total debt} = \frac{\text{Total debt}}{\text{Total assets}}
$$

- Indicates financial risk and financial leverage

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Solvency Ratio: Financial leverage

\[ \text{Financial leverage} = \frac{\text{Total assets}}{\text{Total equity}} \]

• Indicates financial risk and financial leverage

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### Solvency Ratio: Financial leverage

$$
\text{Financial leverage} = \frac{\text{Total assets}}{\text{Total equity}}
$$

- Indicates financial risk and financial leverage

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